APPLICATIONS
OF ANNUITIES
for General Mathematics
Senior High School (CORE)
Quarter 2 / Week 3
1
FOREWORD
This self-learning kit will serve as a guide in studying the
subject area General Mathematics. Guided by the Most
Essential Learning Competencies (MELC) it will be used as
an aid in learning both future and present value of simple
and general annuities.
In this learning kit, students will gain knowledge in
solving the future and present values of types of annuity
dues.
What Happened
This section contains pre-activities like review of the
prior knowledge and a pre-test on what the learners have
learned in their previous discussions.
What You Need To Know (Discussion)
This section contains the discussion in finding the future
and present value of both simple annuities and general
annuities with the representation of a cash flow stream and
the present value and period of deferral of a deferred
annuity. It gives examples with its corresponding solutions
that clearly illustrate the applicability of a mathematical
concept.
What Have I Learned (Evaluation/Post-test)
The exercises contained in this section are guaranteed
to build mathematical comprehension, skills and
competence. These serve as a diagnostic tool to identify
the learners’ areas of strengths and difficulties.
LESSON FINDING THE FUTURE VALUE AND PRESENT VALUE
1 OF BOTH SIMPLE AND GENERAL ANNUITIES WITH
THE REPRESENTATION OF A CASH FLOW STREAM
2
OBJECTIVE S:
K. Differentiates the future value from the present
value
S. Calculates the future value and present value
with the use of a formula or a cash flow stream
A. Holds the character of patience in solving the
future value and present value of the following
types of annuity dues.
I. WHAT HAPPENED
QUICK RECALL
Annuities
can be classified according to payment
interval and interest period
Simple Annuity General Annuity
Payment interval = interest period Payment interval ≠ interest period
PRE-TEST:
Problem-Solving:
1. Mc Julius made yearly deposits of P75,000 at a bank that has 9% interest
compounded annually, for 2 years. Find the present value.
2. Alex made payments of P10,000 at the beginning of every year. If the
company’s interest rate is 6% compounded monthly, what is the future
value after 3 years?
II. WHAT YOU NEED TO KNOW
Simple annuity are annuities when the compounding period is equal to the
payment period while general annuity are annuities where the compounding
period is not equal to the payment period.
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There are examples of annuities like deposits to a savings account,
monthly housing or car mortgages payment, insurance payments, pension or
retirement products, credit cards purchase, loans, and debts.
In this section, we will learn how to calculate the future value and present
value of the following types of annuities.
DISCUSSION
FUTURE VALUE OF SIMPLE ANNUITY
The future value of a simple annuity is the amount of money one has at
the end of the term or the value of the last day of payment. The higher the
discount rate, the higher the future value of the annuity. To find the future
value, we can either use one of the two solutions.
1. Use Time Diagram of the Cash flow or a Cash flow stream 2.
Use the formula:
( 1 + i )n - 1
FV = C [ ]
i
Where:
C = Periodic payment
i = interest rate
n = number of period x number of years Example:
Duke is receiving ₱2,000 annually for the next 5 years and he invested
each payment at 5%. How much would Duke have at the end of the fiveyear
period?
Given:
C = ₱2,000
i = 5% to 0.05
n = number of period (1, annually) x no. of years (5)
Solution 1 Cash Flow
0 1 2 3 4 5
FV = 2,000 + 2,100 + 2,205 + 2,315.25 + 2,431.0125
4
= ₱11,051.2625
Note: This method will only work within a problem with a minimal term of
annuity.
Solution 2 Using the formula
( 1 + i )n - 1
FV = C [ ]
i
FV = 2000 [ ]
0.2762815625
FV = 2000 [ ]
0.05
FV = 2000 (5.52563125)
FV = ₱ 11 051.2625
PRESENT VALUE OF SIMPLE ANNUITY
The present value of an annuity is the current value of future payments
from an annuity, given a specified rate of return. The higher the discount rate,
the lower the value of the annuity. To find the present value, we can either use
one of the two solutions.
1. Use Time Diagram of the Cash flow or a Cash flow stream
2. Use the formula:
1- (1+ i )-mt where:
C = periodic payment
PV = C m
t = no. of years
i [ i = interest rate
m m = no. of compounding
]
Example:
Suppose Mrs. Mariño would like to know the present value of her monthly
deposit of ₱3,000 when interest is 9% compounded monthly. How much is the
present value of her savings at the end of 6 months?
Given:
C = ₱3,000
t = 6 mos or 0.5 years
i = 9% to 0.09
m = monthly (12)
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Solution 1 Cash Flow
0 1 2 3 4 5 6
PV = 2,977.667 + 2,955.501 + 2,933.50 + 2,911.663 + 2,889.988 + 2,868.474
= ₱17,536.79
Note: This method will only work within a problem with a minimal term of
annuity.
Solution 2 Using the formula
1- (1+ i )-mt
PV = C
m
i
[ m
]
1- (1+0.0912 )-12(0.5) PV = 3000 [1- 1+ 0.0075 -6]
PV = 3000
0.09 0.0075
[ ]
0.04384198
PV = 3000 [ ] PV = 3000 [5.84559733]
0.0075
PV = ₱ 17 536.79
FUTURE VALUE OF GENERAL ANNUITY
General annuity are annuities where the compounding period is not
equal to the payment period. To compute the future value, we will follow these
steps.
1. Calculate first the equivalent rate.
2. Solve using the formula of getting the future value
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(1 + i )n - 1
FV = C [ ]
i
Example:
Find the future value of a ₱3,500 annuity payable at the end of every 6
months for 3 years if money is worth 12% compounded monthly.
Solution
Step 1: Calculate the equivalent rate (i)
12% compounded monthly - - - - semi-annually
12%
= 0.01
12
(1 + i) n= ( 1 + i) n
((1 + 0.01)12) = (( 1+ i )2)
( 1 + 0.01)6=(1+ i )
1.061520150601 = 1 + i
1.061520150601 – 1 = i
0.061520150601 = i
Step 2: Use the formula
(1 + i )n - 1
FV = C [ ]
i
FV = 3500 [ ]
FV = 3500 [ ]
FV = ₱ 24 506.76
PRESENT VALUE OF GENERAL ANNUITY
To compute the present value, we will follow these steps.
1. Calculate first j; k
i where :
j= (1+ ) - 1 m i = interest rate
m = no. of compounding
m
k= n
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2. Solve using the formula of getting the present value,
1 - (1 + j)-nt where:
PV = C ( j ) n = number of
times it should be paid in a year t = number of
years
Example:
If Kierus’ profit from his MT job is worth 8% compounded quarterly, what
is the present value of an annuity of P300,000 payable at the end of every six
months for 3 years?
Given:
C = ₱300,000
i = 8% to 0.08 m = no. of
compounding (4,quarterly) n = 2(every 6
mos) k = m/n = 4/2 = 2 t = 3 years
Solution
Step 1: Calculate j;
k
i
j= (1+ ) - 1 m
2
0.08
j= (1+ )-14j
= 0.0404
Step 2:
1 - (1 + j)-nt
PV = C ( )
j
1 - (1 + 0.0404)-2(3)
PV = 300 000 ( )
0.0404
0.211506824
PV = 300 000 ( )
8
0.0404
PV = 300 000 (5.2353174436)
PV = ₱ 1 570 575
III. WHAT HAVE I LEARNED
POST TEST
Problem-Solving
1. Determine the future value of annual deposits of ₱8,000 for fifteen
years into an account earning 11% compounded quarterly.
2. Find the present value of monthly payments of ₱11,000 are required
for twenty years at 8.9% compounded semi-annually.
3. Kalmin’s annuity pays ₱2,700 at the end of each year for 4 years. The
annuity earns 6.5% compounded annually. Determine the present
value of annuity. Construct a cash flow stream.
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REFERENCES
Calamiong, L., et al. 2018. General Mathematics for Senior High School:
Annuity. 148-151. Sta. Ana, Manila: VICARISH PUBLICATIONS
AND TRADING, INC.
Banigon Jr., R., et al. 2016. General Mathematics for Senior High School:
Annuity. 115-120. Cubao, Quezon: EDUCATIONAL RESOURCES
CORPORATION
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SYNOPSIS AND ABOUT THE AUTHOR
AUTHOR
Duke Princeton D. Mariño finish his course at
Negros Oriental State University with a degree of
Bachelor of Science in Mathematics last 2015. He
has Completed Academic Requirements (CAR) in
Master of Science in Mathematics. A Senior High
School Teacher at Pantao National High Sch
ool and a District Planning Coordinator -SHS
of
Mabinay District II.
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LESSON DEFERRED ANNUITY
2
OBJECTIVES:
K. Defines deferred annuity
S. Calculates the present value and period of
deferral of a deferred annuity
A. Appreciates the importance in calculating the present
value of a deferred annuity
I. WHAT HAPPENED
QUICK RECALL
Present value Future value
The sum that must be invested now to The total amount that will be
guarantee a desired payment in the future achieved over time
PRE-TEST:
Problem-Solving
1. On his 40th birthday, Mr. Ramos decided to buy a pension loan for himself.
This plan will allow him to claim ₱10,000 quarterly for 5 years starting 3 months
after his birthday. What one-time payment should he make on his 40th
birthday to pay off this pension plan, if the interest rate is 8% compounded
quarterly?
2. Find the period of deferral in the deferred annuity if the quarterly payments
is ₱300 for 9 years and will start 1 year from now.
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II. WHAT YOU NEED TO KNOW
Deferred annuity is an annuity where in the payment is not made at the
start nor at the end of the first interval. It is an annuity which payments are given
later. Generally, the term “defer” means “to delay”. For example, an annuity
of semi-annually payments which has been deferred for 2 years will have the
first payment at the end of two and half years.
Period of deferral is the time between the purchase of an annuity and
the start of the payments for the deferred annuity.
DISCUSSION
Time Diagram for a Deferred Annuity
C* C*… C* C C… C
0 1 2… k k+1 k+2 k+n
In this time diagram the period of deferral is k because the regular
payments of C start at time k + 1.
The notation C* represent k “artificial payments”, each equal to C, but are
not actually paid during the period of deferral.
PRESENT VALUE OF A DEFERRED ANNUITY
To determine the present value of a deferred annuity, find the present
value of all k+ n payments (including artificial payments), then subtract the
present value of all artificial payments.
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Present Value of a Deferred Annuity
The present value of a deferred annuity is given by
1- (1 + j)-(k + n) 1-(1 + j )-k
PV = C -
Cj j
where
C is the regular payment; j is the interest rate per period, n
is the number of payments k is the number of conversion
periods in the deferral.
Example:
A credit card company offers a deferred payment option for the
purchase of any appliance. Alice plans to buy a smart television set with
monthly payments of ₱4,000 for 2 years. The payments will start at the end of 3
months. How much is the cash price of the TV set if the interest rate is 10%
compounded monthly?
Given:
C = 4,000 m= 12 i(12)=10
Solution:
The annuity is deferred for 2 months and it will go on for 2 years. The first
payment is due at the end of 3 months, or at the end of the 3rd conversion
period. Thus, there are 2 artificial payments.
Number of artificial payments: k = 2
Number of actual payments: n = mt= (12)(2)=24
(12)
i 0.10
Interest rate per period: j= =
=0.00833 m
If you assume that there are payments in the period of deferral, there
would be a total of k+n=2+24=26 payments.
Time Diagram:
4000 4000 … 4000
0 1 2 3 4 … 26
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Thus, the present value of the deferred annuity can be solved as
1-( 1 + j )-(k+n) 1-(1 + j)-k
PV = C
-C j j
1-(1+0.00833)-26 1-(1+0.00833)-2
PV=4000 - 4000
0.00833 0.00833
PV = ₱85,260.53
Therefore, the present value of these monthly pensions is ₱85,260.53
PERIOD OF DEFERRAL
Period of deferral is the time between the purchase of an annuity and
the start of the payments for the deferred annuity.
Example 1:
Find the period of deferral if the regular payment is ₱6,000 semi-annual
for 13 years and will start paying 4 years from now.
Solution: The first payment is at time 8. The period of deferral is from 0 to 7, which
is equivalent to 7 periods or 7 semi-annual intervals.
III. WHAT HAVE I LEARNED
POST TEST
Problem-Solving
1. Harley availed of a loan from a bank that gave him an option to pay
P20,000 monthly for 2 years. The first payment is due after 4 months.
How much is the present value of the loan if the interest rate is 10%
compounded monthly?
2. Find the period of deferral in the deferred annuity if the regular
payment is P50,000 monthly for 3 years and will start paying 8
months from now.
3. Annual payments of P2,500 for 24 years that will start 12 years from
now. Find the period of deferral.
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REFERENCES
Calamiong, L., et al. 2018. General Mathematics for Senior High School:
Annuity. 148-151. Sta. Ana, Manila: VICARISH PUBLICATIONS
AND TRADING, INC.
Banigon Jr., R., et al. 2016. General Mathematics for Senior High School:
Annuity. 115-120. Cubao, Quezon: EDUCATIONAL RESOURCES
CORPORATION
16
SYNOPSIS AND ABOUT THE AUTHOR
This Self Learning Kit (SLK)
focuses on how to solve present
value of a deferred annuity.
Exercises, activities and
examples are designed to
enhance the critical and
analytical thinking skills of the
learners.
Let’s enjoy solving problems
in General
Mathematics as it stimulates our
initiative and creativity.
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AUTHOR
Duke Princeton D. Mariño finish his course at
Negros Oriental State University with a degree of
Bachelor of Science in Mathematics last 2015. He
has Completed Academic Requirements (CAR) in
Master of Science in Mathematics. A Senior High
School Teacher at Pantao National High School
and a District Planning Coordinator -SHS of
Mabinay District II.
DEPARTMENT OF EDUCATION
SCHOOLS DIVISION OF NEGROS ORIENTAL
SENEN PRISCILLO P. PAULIN, CESO V
Schools Division Superintendent
JOELYZA M. ARCILLA, EdD
Assistant Schools Division Superintendent
MARCELO K. PALISPIS, EdD
Assistant Schools Division Superintendent
NILITA L. RAGAY, EdD
OIC - Assistant Schools Division Superintendent
CID Chief
ROSELA R. ABIERA
Education Program Supervisor – (LRMS)
ELISA L. BAGUIO, EdD
Division Education Program Supervisor – MATHEMATICS
MARICEL S. RASID
Librarian II (LRMDS)
ELMAR L. CABRERA
PDO II (LRMDS)
DUKE PRINCETON D. MARIÑO
Writer
RADHIYA A. ABABON
Lay-out Artist
_________________________________
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DISCLAIMER
The information, activities and assessments used in this material are designed to provide accessible learning modality to the teachers and learners of
the Division of Negros Oriental. The contents of this module are carefully researched, chosen, and evaluated to comply with the set learning
competencies. The writers and evaluator were clearly instructed to give credits to information and illustrations used to substantiate this material. All
content is subject to copyright and may not be reproduced in any form without expressed written consent from the division.
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